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A Meta Modeling Meditation

November 24, 2012 9:53 amNovember 24, 2012 9:53 am

I’m still thinking about the whole “America could only give workers decent living standards when it didn’t face competition”
discussion. For one thing, this is an old favorite discussion of mine; the “growth and trade” literature goes back more than 60 years, but there aren’t, I think, many prominent economists working
today who know much about that tradition, so I may be the last of the Mohicans or something. For another, this subject is a perfect illustration of the important of actually having a model – I’ll explain
in a minute what I mean by that. And one more point: what we learn from this story is that a model may be created to answer one question, or defend a particular position, but if it’s a good model it can be
used in multiple settings, and sometimes may even end up supporting a different side in the political debate.

So, on the first point: the origins of this literature go back to the immediate postwar years, when it was common to argue that US technological superiority made it impossible for Europe to compete. Yet basic trade
theory says that trade depends on comparative advantage, not absolute advantage – you can gain from trade even if you’re less productive across the board, simply by concentrating on the areas in which
your productivity lags least. Did the “dollar shortage” argument make any sense in that framework?

Enter John Hicks, who rephrased it not as a question about gains from trade but as a question about the effects of technological progress in your trading partners. And he laid out a rudimentary model to address that
question.

Some readers asked, what do I mean by a “model”? The answer is, I’m pretty generous on that front – it could be solved equations, it could be a computer simulation, it could be a physical
apparatus like the Phillips hydraulic Keynesian model, or it could just be a carefully written verbal discussion
like Hume’s essay on the balance of trade. What makes it a model is that however it’s presented, it involves a careful discussion of
micromotives and macrobehavior – that is, it describes what individuals are doing (not necessarily out of perfect rationality), and how that individual behavior adds up to some aggregate outcome. Crucially,
it’s not just a set of slogans.

Now, having a model is no guarantee of being right – real business cycle theory certainly fits my definition, but I believe that it offers a fundamentally wrong account of what recessions are all about. Still,
writing down a model rules out certain kinds of error, the kind that come from not thinking about things add up. Most of the bad reasoning on the postwar situation comes from an almost ridiculous error –
forgetting that not having competitors doesn’t help if you also don’t have any customers. Having a model lets you avoid that sort of thing.

What the Hicks analysis and later versions (notably Dornbusch-Fischer-Samuelson (pdf)) tells us is that technological progress in other countries can either help or hurt you, depending on which industries are affected; it also tells you to look at the terms of trade, which in practice means
that it turns out to be a smaller issue than many people imagine.

What’s interesting about this analysis from a political point of view is that more or less the same model has served different causes at different times. In postwar Europe, Hicks-type analysis was a corrective
people arguing against market economies open to trade; it was, if you like, a helpful support to free-marketeers. In the early 1990s, I and other used this kind of analysis to counter both left-of-center demands
for protectionism and corporate-welfare arguments for subsidies to fight Japan and all that. Yet right now the analysis turns out to be useful mainly to counter right-wing claims that the experience of America in
the 50s and 60s, when good wages and progressive taxation went hand in hand with rapid growth, can be dismissed by appealing to the lack of international competition.

The point is that a helpful economic model is not a propaganda slogan, to be discarded whenever the party line changes. It is, instead, a structure that can be used to improve your understanding in many contexts.

Oh, and the best answer to “gotcha” attempts to debunk economists – “Ha! You said just the opposite in 2003!” – is to ask whether and how the economist’s model has changed.
If he is using the same model, but it’s one that has different policy implications in different situations, you’ve just done a gotcha on yourself. If he has changed his model, the question is why,
and whether there were good reasons for the change.

And yes, I’ve changed my models, mainly in the face of experience. For example, I didn’t take either the liquidity trap or the possibility of self-fulfilling currency crises seriously until 1998, when
events in Asia led me to change my views. And I’m proud, not ashamed, of showing that kind of intellectual flexibility. What I don’t believe I’ve done is change my models to support a predetermined
political or policy position, which is a definite sin.

So you should try to think in terms of models; it will make you a better person.